Change Of Heart?
I sat at my desk well after the closing bell on Monday afternoon. Just how meaningful was that late-day reversal? Of course, I would like to read a lot into it. The entire rally off of the lows to where markets finished all occurred in under ninety minutes. Energy stocks led the way, following front month futures pricing for WTI Crude. Those futures have remained in demand overnight.
Beyond energy, it was the Information Technology sector that carried equity markets, or at least the Nasdaq Composite. The positive takeaway there might be that while software industry names showed strength all day, it was the semis that got hot late. The Philadelphia Semiconductor Index closed up 1% on the day. And it was an impressive 1%. The group saw leadership re-established by two of our favorites here at Market Recon: Advanced Micro Devices (AMD) , and Nvidia (NVDA) , closing up 5.3% and 3%, respectively.
Digging a little deeper, we see that though the Nasdaq Composite (+1.2%) was able to decisively outperform the broader marketplace, that trading volume did indeed decline on Monday from Friday up at Times Square, while trading volume for the index itself finished well below it's own 50-day simple moving average. Winners beat losers by the slimmest of margins at the Nasdaq Market Site, but advancing volume clobbered declining volume by almost two to one, possibly suggesting a bit more than churn.
The S&P 500 might have put in a more pedestrian gain of 0.4%, but an increase that appears from higher altitude to have some foundation. Trading volume for that index (though still well below recent moving averages) did in fact increase on Monday from Friday, as did trading volume at the New York Stock Exchange. The difference is that breadth was slightly negative across the NYSE, which is more in line with the softer gains made by the indices more exposed to NYSE-listed names. Don't forget the higher level of exposure that this group has to the airlines specifically, but more broadly, the transports and the industrials. This group was perhaps targeted by algorithms and traders alike in the wake of comments made over the weekend by Berkshire Hathaway's (BRK.A) , (BRK.B) Warren Buffett.
It's one thing for markets to react negatively to musings over a renewal of the trade war between the U.S. and China. For now, at least, the economy is much smaller -- and by necessity, supply chains have to evolve significantly. I think it almost tragic from an investment perspective that the world's highest-profile "value" investor not only evacuated all positions across the airline industry, but remains unable to find something attractive somewhere else.
One thought might be, just how bad are things going to get, if this type of investor was a seller in a weak market. Another thought, and one that I had on Monday, though I rarely trade the airlines, was why would you sell these names back down to their March lows -- not because they don't belong there, because maybe they do -- but because the biggest fish in the pond has told you he's done selling. Doesn't that seem like the wrong time to sell something? I have to believe that Monday's broad pressure on airline stocks has to be more algorithm related than generated by cognitive reasoning. Anyone ever hear of a "clean-up" order? Still, I am not about to jump right in, but I have never been big in that space to begin with. My opinion? The recent uptrend remains technically intact for me. For now. This is an evolving story.
Tuesday in Europe. Zero-dark hours in New York. The wiggle. What wiggle? I first noticed a sudden weakness in S&P futures prices, and then noticed that this reaction had been caused by similar softness across Europe. European equities and S&P 500 futures did stabilize at lower levels, but still higher for the session, after Germany's constitutional court made a ruling that the ECB's purchases of public debt were indeed legal, but that the ECB had to assess whether or not these purchases are proportionate as the central bank puts into practice policy meant to aid member states currently juggling budget concerns through this public health / global financial crisis.
The catch here is this... should the ECB be unable to show that current policy is not disproportionate within a three month transitional period, then the Bundesbank (Germany's central bank) will no longer be permitted to participate in these bond purchases. The ruling caused more than this wiggle around equity markets. Sovereign debt yields rose across several possibly impacted nations, while the U.S. dollar spiked against the euro.
Speaking Of Purchasing Debt
The numbers are staggering. We all knew that they would be. Not this Friday's employment data, though that is certainly part of this picture. On Monday, the U.S. Treasury Department announced the need to borrow just a tick under $3T for the second quarter. To put this in perspective, the federal government borrowed $477B over the first quarter of 2020.
Of course, the issue here is dealing with both the federal government's need to respond simultaneously to an ongoing public health crisis as well as the deepest national financial crisis experienced during any of our lifetimes. This, as in order to keep money in people's pockets longer as well as socially distanced, the IRS pushed its annual tax deadline out from April 15 to July 15. Not only does that deprive the federal government of much-needed tax-generated revenue, I think it now plain as day that these revenues will be far lower in July than they were expected to be earlier in the year. Obviously, not because folks made less money in 2019, but because households and businesses are probably far less solvent in mid-2020 than they were only a couple of months back.
Treasury is throwing a $4.5T figure around as what borrowing needs might be for the fiscal year that ends on September 30th. This would include a next quarter expectation that there will be a federal need to borrow $677B. This does not include what I think we all know is coming, which may or may not be part of this fiscal year, and that will be another sizable, very expensive fiscal aid package that will likely have to include some kind of aid to state/regional governments, more aid to hospitals/first responders, more aid to small business/individuals, and if safe to work... an infrastructure build.
New normal? You bet it is. The national debt already stands close to $25T. What will that number be next year? $30T? Who will buy all of this debt? Can it all be placed on the Fed's balance sheet? Where does that end up? $12T? $15T? Where will that leave the US dollar? Relative to reserve currency peers? There will be a new normal. Just won't look like anything we're comfortable with.
Couldn't believe my eyes. There it was. Live baseball on the Walt Disney Company's (DIS) ESPN network as the futures did that wiggle earlier. Yes, Disney reports this afternoon, and the quarter is not expected to be one of their best by a long shot. That said, live sports broadcast live on the company's still most profitable cable network has to be a positive. ESPN will broadcast six games a week as the English language home of the (South) Korea Baseball Organization in agreement reached with Eclat Media. This morning's game pitted the NC Dinos versus the Samsung Lions. For those who might not be baseball nerds, Korea's top league is a respected professional baseball league. There were no fans present at the game, of course.
Apple (AAPL) went to the well of corporate issuance on Monday, borrowing $8.5B over four tranches with the furthest maturity going out 30 years. The firm has $8B worth of both U.S. and Japanese debt coming due later this year, and has stated that the new cash raised will be used for general corporate purposes, dividend payments, share repurchases and debt repayment.
Through last week, more than $807B worth of investment-grade corporate debt has been issued since the start of the year. This puts 2020 on record pace, according to Back of America Global Research. Other high-profile names tapping the well on Monday included both Starbucks (SBUX) , and Amgen (AMGN) .
The shares of L Brands (LB) sold off sharply overnight, as Sycamore Partners terminated its agreement to acquire a majority position in the firm's "Victoria's Secret" side of the business. For their part, L Brands has stated that the firm will move forward with the plan to separate Bath & Body Works from Victoria's Secret and have that business operate in stand alone fashion.
Economics (All Times Eastern)
08:30 - Balance of Trade (Mar): Last $-39.9B.
08:55 - Redbook (Weekly): Last -8.1% y/y.
09:45 - Market Services PMI (Apr-rev): Flashed 27.0.
10:00 - ISM Non-Manufacturing Index (Apr): Expecting 35.8, Last 52.5.
16:30 - API Oil Inventories (Weekly): Last +10M.
13:00 - Baker Hughes Oil Rig Count (Weekly): Expecting 806, Last 804.
The Fed (All Times Eastern)
10:00 - Speaker: Chicago Fed Pres. Charles Evans.
14:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.
14:00 - Speaker: St. Louis Fed Pres. James Bullard.